Sales and Trading Salary vs Investment Banking
It seems like since the beginning of time,and investment banking have been the dream jobs of countless undergrads seeking big bucks. A lot changed when the financial crisis of 2008 came along, and trading was arguably the most affected industry. There's a popular notion that trading salaries have dipped so deep it's no longer a worthy pursuit. While it's true that trading salaries will never reach the skies like they did pre-2008, trading salaries and the industry altogether remain a very worthy pursuit.
Investment banking analysts make around $120-130k all-in. A S&T analyst salary is pretty comparable, anywhere from $110-130k all-in. Second-year analysts make 10-15% more than those figures in both IB and S&T, give or take. As you climb the ranks, IB tends to make slightly more than S&T, although that's only based on averages.
The main difference between IB compensation and S&T compensation is performance. In IB, bonuses vary based on how you rank against your peers, but the difference in bonus is marginal. In S&T, bonuses can easily vary by $100k+.
Performance drives S&T, and it drives the salary in S&T, too. Top performers in S&T make far more than their peers at an equal level in IB. There are traders pulling in a million dollar bonus before they reach 30 years of age, but those traders are far rarer than they used to be. (See the S&T Myth - Shrinking Salaries section for more on that.)
The significance of performance and performance-based bonuses varies in S&T depending on the type of shop/bank. The most risky type of trading is the most dependent on performance and has the greatest variation in bonus depending on performance. The opposite is true for low risk trading. The greatest risk/reward type of trading to the most risk averse type of trading follows this order:
- Proprietary Trading: Trading with the shop's (and your own, at more extreme shops) money. Idea generation falls entirely on the shop.
- Flow Trading: A mix between and agency trading, it's trading with a client's money on ideas generated by the shop.
- Agency Trading: Executing a client's trade request with their money entirely.
Among these three branches of trading, there are many more branches that qualify the type of securities traded (fixed income, emerging markets, etc.). These three types of trading all involve an element of performance since S&T is extremely meritocratic. That's why - despite extreme uncertainty and shifts in the industry - there's still an incredible demand for S&T jobs out of undergrad.
Another critical factor to consider when comparing IB salaries is the lifestyle. In investment banking, lifestyle is pretty much nonexistent as you'll be pulling an average of 80 hours per week. This is opposed to S&T, where you'll be pulling an average of 40-60 hours (closer to 60, but it depends on what you're working on at the time). While salaries across IB and S&T are comparable, people in S&T make roughly the same and lead a far better lifestyle.
Sales and Trading Compensation Per Level
With the help of thousands of users who privately provided their compensation data, WSO has been able to develop accurate salary information for S&T. Although this information is from 2010, the figures are still accurate, give or take a little bit. We've also compiled information (thanks to 30,000+ unique users) on salary, career opportunities, satisfaction, and much more as of 2017 to create the WSO Private Equity Industry Report and the WSO Investment Banking Industry Report.
Sales & Trading Shrinking Salary Myth
There's this idea that salaries in S&T are shrinking, but that idea is, in fact, a misconception based on the status of the industry. The fact is, S&T is shrinking because of regulations. Desks can't and are no longer willing to incur as much risk as pre-2008 trading, and many banks are closing desks. The result isn't lowered salaries, but fewer jobs. While the industry is undergoing massive change, it will still always exist in some form or another.
The days of million dollar bonuses and high-flying everywhere you look in S&T are over. Despite the hit salaries took post-2008, getting an S&T job is hyper-competitive due to the dwindling number of desks. Salary is still comparable to investment banking, but in terms of career versatility, IB is the clear winner - notably as a stepping stone to private equity. Ultimately, this means that S&T isn't a field you should pursue unless you have a passion for trading.
Prop Trading Pay Structure
To reiterate the different types of trading:is trading on account of the firm and yourself. This is opposed to agency trading, which is simply executing trades; traders at banks are agency traders. Flow trading is in the middle of both; it's trading on account of the clients but the firms generate the ideas.
Prop trading compensation functions a little different from agency/flow trading because you're trading with the firm's money and/or your own money.
Profit and loss (P&L) is the percentage of money you make on your trades (or the lack of money you make if you lost money trading). Generally, bulge bracket traders don't get paid on P&L. Their bonuses are based on ranking/rating/bucket. Prop traders can make anywhere from 10-90% P&L.
What Goes Into Sales & Trading Salary?
(Base) + (P&L - Seat Cost) * P&L% = All-in Compensation
Here is an example of how bonuses are calculated from @MeatHead":
Bank pay is around 6%. Some years less but rarely ever more than that. I think it's safer saying, if you got 6%, you would be satisfied. The pay is low, low relative to uber drivers, because of the, middle office, MDs in said /MO/Compliance that get paid 250k salaries for sitting on their asses that the trader has to make revenue for. This fixed-cost per seat usually comes out around to 2-3mm.
So take your trader (Pnl-this seat cost(2-3mm))*.06
So if I make 10mm around early December, which is when most banks effectively cut off Pnl for bonus purposes, 3mm is dinged against me, and I net 7mm in Pnl. This 7mm * 6% is 420k minus my 160k salary nets me 260k in bonus. Working at banking they will pay 70-75% in cash, and the rest will be vested over the next 4 years in a combination of bank stock and cash. If I quit before the 4 years, I get only a pro-rated share that I've already received.
This is usually how a trader's compensation is determined. Base depends on level, whereas bonus is determined by P&L, which is reasonably reflective of your performance.
If you're in debt at the end of the year, you'd likely end up with no bonus.
Struggling Industry - Is Trading Worth It?
There's no doubt that trading has changed significantly since 2008. The number of desks nowadays pales in comparison to the amount back in the day. Fewer jobs are available, but that doesn't distract from the distinct appeal of the trading environment. Your own success is up to you, both in terms of landing a job in S&T and in terms of succeeding as a trader. Here's how you can easily answer, Is trading worth it? from @setarcos.
If you can make money trading, then yes, it is. If you can't, then there's no point pursuing a career.
Tech/market structure, etc. is so different for each product that, ''Oh guys, it'll be automated," makes no sense. You gonna automate distressed credit trading, ya? Good luck.
So back to the original question - can you make money trading? How are you going to find that out? Well, by trying it, PA or otherwise, but until you actually take risk and try, you won't know the answer.
The fact is there will always be jobs available in trading. You reap what you sow, and if you want to reap the rewards of trading, then you better be prepared to put in the work. Trading salaries remain solid, and the environment is constant. Competition is fierce, so if you have a passion for trading, start trading early on your own personal account.
I've done a lot of searching, and surprisingly, there hasn't been much discussion on this topic, and there's no clear cut answer. It seems like trading salaries and banking salaries are more or less the same. Can someone confirm this? If so, why are so many more people willing to pull in 40+ additional hours per week for the same pay?